Last year at this time, we rolled out what we believed to be the first index comprised of companies trading below their net current asset value. It was an experiment to test the notion that "passive" management of net/nets could generate above-market returns.
The CS21 Net/Net Index was down about 36% in its first year, versus -40% for the Russell Microcap Index. Hardly proves our theory about the relevance of applying a scatter gun approach to net/net investing, but we'll continue to let this index run as is rather than rebalancing, in order to judge the results over a longer time horizon.
Just two of the 21 companies in the index were in positive territory during the period, as The Finish Line rose about 80%, and Anadys Pharmaceuticals was up 280%. During the year, one company, Renovis, was acquired, and we decided not to replace it in the index.
We still plan on rolling out an additional net/net index in the near future, and are finding the quality of names much better now than those available at this time last year.
For more on the CS21 Net/Net Index, below is the original post we ran at this time last year.
February 15th 2008
Introducing the Cheap Stocks 21 Net/Net Index: The First Index of Companies Trading Below Net Current Asset Value
We’ve designed what we believe to be the first index of companies trading below their net current asset value. The main purpose of this index will be to track a passive portfolio of net/nets. This index is chock full of small companies many of which have been beaten down, and some of which may not survive. We’ve developed this index primarily as an attempt to gauge net/net performance using a basket approach.
The Cheap Stocks 21 Net/Net Index is a market cap weighted index comprised of companies that met the following criteria at index inception on Tuesday, February 12th, 2008:
•Market Cap is below net current asset value, defined as:
Current Assets – Current Liabilities – all other long term liabilities (including preferred stock, and minority interest where applicable)
•Stock Price above $1.00 per share
•Companies have an operating business; acquisition companies were excluded
•Minimum average 100 day volume of at least 5000 shares (light we know, but welcome to the wonderful world of net/nets)
*Index constituents were selected by market cap. The index is comprised of the “largest” companies meeting the above criteria.
The Index is naïve in construction in that:
•It will be rebalanced annually, and companies no longer meeting the net/net criteria will remain in the index until annual rebalancing.
•Only bankruptcies, de-listings, or acquisitions will result in replacement
•Does not discriminate by industry weighting—some industries may have heavy weights.
Cheap Stocks 21 Net/Net Index Constituents and Weights (%, rounded):
Adaptec Inc(ADPT)18.72%
Computer Systems
Audiovox Corp(VOXX)12.20%
Electronics
Trans World Entertainment(TWMC)7.58%
Retail-Music and Video
Finish Line Inc(FINL)6.30%
Retail-Apparel
Nu Horizons Electronics(NUHC)5.76%
Electronics Wholesale
Richardson Electronics(RELL)5.09%
Electronics Wholesale
Pomeroy IT Solutions(PMRY)4.61%
IT
Ditech Networks(DITC)4.31%
Communication Equip
Parlux Fragrances(PARL)3.92%
Personal Products
InFocus Corp(INFS)3.81%
Computer Peripherals
Renovis Inc(RNVS)3.80%
Biotech
Leadis Technology Inc(LDIS)3.47%
Semiconductor-Integrated Circuits
Replidyne Inc(RDYN)3.31%
Biotech
Tandy Brands Accessories Inc(TBAC)2.94%
Apparel, Footwear, Accessories
FSI International Inc(FSII)2.87%
Semiconductor Equip
Anadys Pharmaceuticals Inc(ANDS)2.49%
Biotech
MediciNova Inc(MNOV)2.33%
Biotech
Emerson Radio Corp(MSN)1.71%
Electronics
Handleman Co(HDL)1.66%
Music- Wholesale
Chromcraft Revington Inc(CRC)1.62%
Furniture
Charles & Colvard Ltd(CTHR)1.50%
Jewel Wholesale
The initial value of the Cheap Stocks Index was 100, as of the close on 2/11/08. Initially, we’ll report the index value on a weekly basis.
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
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